Cities Sharing the Risk--and the Premium : Pooling Is Creative Approach to Beating High Cost of Insurance

It is called "going bare," and for cities, it is the equivalent of streaking through a congested thoroughfare.

Torrance has been doing it since last October, El Segundo since November, Rolling Hills since January and Hawthorne since February. Hermosa Beach flirted with the idea several months ago, but prudence prevailed.

In the municipal liability insurance industry, going bare means going uninsured. For cities, that translates into having no outside protection against the hundreds of claims filed against them each year.

'We Are Vulnerable'

"We think it is very serious," said Jose Sanchez, finance director in El Segundo. "We are very vulnerable."

If a resident who falls off a broken swing in a city park wins a suit against the city, for example, an uninsured city must pay the award with money from its reserves or general fund. Cities with liability insurance, by contrast, usually must pay small claims, but the larger ones are picked up by insurance companies.

Frustrated by their inability to get coverage or affordable premiums from major insurance carriers, eight South Bay cities and 26 other cities in the Los Angeles area have joined in hopes of creating a self-financed insurance pool--a cities-run insurance business of sorts.

The insurance companies say they are losing money on policies with cities and other public agencies because they are exposed to high risks. They say the municipal liability insurance business has become too expensive, forcing them to drop out of the market.

A major cause, both cities and insurance carriers say, is the so-called "deep pockets" principle. Accident victims have collected large sums from cities whose degree of fault was minor when individuals principally at fault did not have the ability to pay the damages awarded by the court.

Torrance, El Segundo, Rolling Hills and Hawthorne have all been dropped by their insurance companies, and no other carrier has been willing to take on their coverage. Redondo Beach was able to renew its policy last October with Planet Insurance Co., but only after officials accepted one-third of the coverage they had the year before and agreed to pay six times as much for it.

"We are better off than many others in that we have insurance," said Redondo Beach City Manager Timothy Casey. "But we have no guarantee that Planet will renew us when we come due in October, and we have no guarantee that Planet won't cancel us tomorrow because they've decided to get out of the business."

In the pool, member cities would pay annual premiums that would be used to establish reserves, pay claims awarded against cities and pay the debt service on "certificates of participation," which are similar to bonds.

The pool would sell up to $25 million in the tax-exempt certificates to serve as an interest-bearing reserve, which could be tapped if cities are hit with multimillion-dollar awards.

In addition, pool members would have a self-insured retention--meaning that claims below a certain amount would be paid by the city rather than the pool--but above the retention level all risks would be shared by all members. Premiums paid by Inglewood, for example, would help pay for claims made against Manhattan Beach, and vice versa.

The self-insured retention is similar to a deductible, except that the city is also responsible for legal and other costs associated with awards that fall within the retention level.

Premiums Would Vary

Preliminary estimates show that premiums through the pool would be much cheaper than those cities are now paying. In the case of Redondo Beach, the city would pay an estimated $198,000 for $10 million in coverage with a $500,000 self-insured retention. The city now pays $482,000 for $5-million coverage with a $400,000 self-insured retention.

The actual pool premiums, however, would depend on how many cities join and what level of coverage those cities want.

The pool, which is scheduled to be in operation late next month, is being set up by the Independent Cities Risk Management Authority, 12 cities that organized in 1980 to buy municipal liability insurance as a group. Since then, the cities have also joined to buy property insurance, health insurance and workers compensation, according to David Smith, a management consultant for the authority.

Other Pools Forming

Marsh & McLennan Inc., brokers based in San Francisco who have been setting up the self-financing pool, are organizing similar pools in Northern California.